<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarter ended September 30, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition from _________ to _________.
Commission file number 333-81987
SLEEPMASTER L.L.C.
(Exact name of registrant as it appears in its charter)
New Jersey 22-3341313
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2001 Lower Road, Linden, New Jersey 07036-6520
(Address of principal executive offices) (Zip Code)
(732) 381-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
All of the registrant's voting and nonvoting membership interests are held by
affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
Class A common units, no par value - 8,000 units as of November 14, 2000
Class B common units, no par value - 0 units as of November 14, 2000
<PAGE> 2
SLEEPMASTER L.L.C.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - Financial Information (unaudited)
Item 1 - Financial Statements
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2000
and 1999............................................... 3
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999................. 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2000 and 1999..... 5
Notes to Condensed Consolidated Financial Statements..... 6-17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 18-21
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk.............................................. 21
PART II - Other Information
Item 1 - Legal Proceedings......................................... 22
Item 6 - Exhibits and Reports on Form 8-K.......................... 22
Signatures........................................................ 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $100,114 $ 48,131 $ 220,133 $122,112
Costs and expenses:
Cost of sales 61,017 29,701 135,355 75,769
Selling, general and administrative
expenses 26,191 11,245 57,038 29,446
Amortization of intangibles 1,985 600 3,892 1,440
Interest expense, net 8,574 3,423 18,920 8,293
Other (income) expense, net (3) 93 42 59
-------- -------- -------- --------
Income before income taxes and
extraordinary items 2,350 3,069 4,886 7,105
Provision for income taxes 2,021 1,298 3,048 3,016
-------- -------- -------- --------
Income before extraordinary items $ 329 $ 1,771 $ 1,838 $ 4,089
Extraordinary items, net of income taxes -- -- (208) (3,167)
-------- -------- --------- --------
Net income $ 329 $ 1,771 $ 1,630 $ 922
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,386 $ 2,842
Accounts receivable, less allowance for doubtful accounts
of $3,001 and $2,360 40,909 24,217
Accounts receivable--other 1,872 1,691
Inventories 13,814 7,531
Other current assets 2,774 613
Deferred income taxes 565 720
--------- ---------
Total current assets 62,320 37,614
--------- ---------
Property, plant and equipment, net 49,779 20,967
Intangible assets, net 303,021 130,824
Other assets 12,237 7,290
Deferred income taxes -- 12,292
--------- ---------
Total assets $ 427,357 $ 208,987
========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 28,858 $ 14,264
Accrued advertising and sales allowances 11,087 5,755
Accrued interest 6,872 2,077
Other current liabilities 8,631 6,472
Current portion of long-term debt 9,890 5,010
--------- ---------
Total current liabilities 65,338 33,578
--------- ---------
Long-term debt 272,096 161,603
Deferred Income Taxes 31,915
Other liabilities 2,081 1,463
--------- ---------
Total long-term liabilities 306,092 163,066
--------- ---------
Commitments and contingencies
Redeemable cumulative preferred interests 22,255 20,423
Members' Equity (Deficit):
Class A common interests 54,452 12,229
Class B common interests -- --
Accumulated deficit (20,674) (20,472)
Foreign currency translation adjustment (106) 163
--------- ---------
Total members' equity (deficit) 33,672 (8,080)
--------- ---------
Total liabilities and members' equity (deficit) $ 427,357 $ 208,987
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
SLEEPMASTER L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net cash provided by operating activities(1) $ 24,172 $ 11,752
Cash flows from investing activities:
Purchases of property, plant and equipment, net (6,524) (2,938)
Proceeds from sale of asset -- 11
Acquisitions, net of cash acquired (160,900) (41,573)
-------- --------
Net cash used in investing activities (167,424) (44,500)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of senior subordinated notes 25,000 115,000
Proceeds from long-term debt 167,117 --
Payments on long-term debt (83,344) (64,281)
Loan origination fees/bond issuance costs (5,898) (5,787)
Penalties on early extinguishment of debt -- (3,645)
Borrowings under revolving line of credit 25,060 --
Payments on revolving line of credit (27,361) --
Capital contributions 42,222 --
Distributions -- (748)
-------- --------
Net cash provided by financing activities. 142,796 40,539
-------- --------
Net (decrease) increase in cash and cash equivalents (456) 7,791
Cash and cash equivalents, beginning of period 2,842 162
-------- --------
Cash and cash equivalents, end of period $ 2,386 $ 7,953
======== ========
</TABLE>
(1) Depreciation and amortization totaling $6,381 and $2,499 for the nine months
ended September 30, 2000 and 1999, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
SLEEPMASTER L.L.C.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Sleepmaster L.L.C. ("Sleepmaster") and all majority-owned
domestic and foreign subsidiaries (the "Company"). All material intercompany
transactions and balances have been eliminated. The interim statements are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the Company's financial position as of September 30, 2000 and
the results of its operations and cash flows for the interim periods presented.
The condensed consolidated balance sheet data at December 31, 1999 is derived
from the audited financial statements which are included in the Company's Form
10-K/A for the year ended December 31, 1999 and which should be read in
connection with these financial statements. In accordance with the rules of the
Securities and Exchange Commission, these financial statements do not include
all disclosures required by generally accepted accounting principles.
Operating results for the three and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for any
other interim period or for the year ending December 31, 2000.
Certain reclassifications of previously reported financial information
were made to conform to the 2000 presentation.
2. ACQUISITIONS
On April 28, 2000, Sleepmaster acquired all the capital stock of Simon
Mattress Manufacturing Co. ("Simon")for approximately $42,623,000 in cash.
Sleepmaster financed the acquisition using proceeds from a second amended and
restated credit facility.
On June 30, 2000, Sleepmaster acquired all the capital stock of
Crescent Sleep Products Company ("Crescent") for approximately $118,277,000 in
cash. Sleepmaster financed the acquisition using proceeds from a third amended
and restated credit facility, the issuance of an additional $25,000,000 of
senior subordinated notes, and $41,500,000 of equity from a group of investors
and certain members of Crescent's management.
These acquisitions were accounted for under the purchase method and,
accordingly, Simon's and Crescent's results are included in the consolidated
financial statements since their respective dates of acquisition. The assets
acquired and liabilities assumed have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase price over the
estimated fair values of the net assets acquired has been recorded as goodwill
and is being amortized over 40 years.
A summary of the purchase price allocations (in thousands) is as
follows:
<TABLE>
<CAPTION>
SIMON CRESCENT
----- --------
<S> <C> <C>
Current assets......................... $ 11,728 $ 13,123
Property, plant and equipment.......... 8,756 15,996
Other assets........................... 285 6,434
Goodwill............................... 15,128 39,835
License ............................... 20,495 94,581
Current liabilities.................... (5,476) (7,591)
Long-term debt......................... -- (8,900)
Other liabilities...................... (8,293) (35,201)
------- --------
Total........................... $ 42,623 $ 118,277
</TABLE>
6
<PAGE> 7
The following summarized unaudited pro forma financial information (in
thousands) for the nine month periods ended September 30, 2000 and 1999 assumes
that the acquisitions of Simon and Crescent were consummated on January 1, 1999.
This information is not necessarily indicative of the results that the Company
would have achieved had these events actually occurred on such dates or of the
Company's actual or future results.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Net sales............................... $ 276,799 $274,300
Income before extraordinary items....... 150 6,520
</TABLE>
The unaudited pro forma income before extraordinary items, for the
nine months ended September 30, 2000, includes one-time transaction related
expenses for legal and investment banker fees of approximately $2,837,000.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
<S> <C> <C>
Raw materials.................................................... $ 10,267 $ 5,402
Work-in-process.................................................. 870 476
Finished goods................................................... 2,677 1,653
---------------- ----------------
Total inventories....................................... $ 13,814 $ 7,531
================ ================
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
<S> <C> <C>
Goodwill......................................................... $ 97,225 $ 35,176
Licenses......................................................... 215,325 100,249
---------------- ----------------
312,550 135,425
Less: accumulated amortization................................... 9,529 4,601
---------------- ----------------
$ 303,021 $ 130,824
================ ================
</TABLE>
5. DEBT
On April 28, 2000, the Company expanded and restated its existing
credit facility to provide for an aggregate amount of borrowings of up to
$103,875,000, comprising a $33,000,000 revolving credit facility, a $35,875,000
amortizing term loan facility and a $35,000,000 incremental amortizing term loan
facility (the "Second Amended and Restated Credit Facility"). The terms of the
Second Amended and Restated Credit Facility were substantially equivalent to
those of the prior facility. Borrowings under the Second Amended and Restated
Credit Facility were used to finance the acquisition of Simon.
7
<PAGE> 8
On June 30, 2000, in connection with the acquisition of Crescent, the
Company issued an additional $25,000,000 of 13.4% senior subordinated notes due
November, 2009. Also on June 30, 2000, the Company entered into a third amended
and restated credit agreement to provide for an aggregate amount of borrowings
of up to $172,500,000, comprising a $40,000,000 5.5 year revolving credit
facility, a 5.5 year Tranche A term loan of $57,500,000 and a 6.5 year Tranche B
term loan of $75,000,000 (the "Third Amended and Restated Credit Facility").
This new facility included a letter of credit sublimit of $25,000,000. Similar
to the prior credit facility entered into on November 5, 1999, borrowings under
this credit facility bear interest at floating rates based on LIBOR or
applicable alternative base rates. Sleepmaster financed the acquisition of
Crescent using proceeds from the Third Amended and Restated Credit Facility, the
issuance of the $25,000,000 senior subordinated notes, and $41,500,000 of equity
from a group of investors and certain members of Crescent's management.
In connection with the Third Amended and Restated Credit Facility, the
company wrote-off unamortized debt issuance costs. One bank included in the
syndication of banks which was part of the Second Amended and Restated Credit
Facility did not continue in the syndication of banks in connection with the
Third Amended and Restated Credit Facility and its debt was extinguished. An
extraordinary loss of $208,000, net of the associated income tax benefit, was
recorded in connection with this extinguishment during the three months ended
June 30, 2000. In accordance with the Emerging Issues Task Force No. 98-14, for
banks which continued with the syndication of banks in connection with the Third
Amended and Restated Credit Facility, a charge to interest expense of $564,000
to write-off unamortized debt issuance costs was recorded during the three
months ended June 30, 2000.
At June 30, 2000, the Company was not in compliance with two financial
covenants contained in the Third Amended and Restated Credit Facility (1) the
Interest Coverage Ratio and (2) the Minimum Consolidated EBITDA. The failure to
comply with these covenants constituted an event of default. On September 19,
2000 the lenders granted a waiver for the debt covenant violations and an
amendment to the Third Amended and Restated Credit Facility (the "waiver and
First Amendment to the Third Amended and Restated Credit Facility" or the
"Waiver and Amendment"). The Waiver and Amendment also modified various
financial covenants going forward including the two identified above.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
issued SAB 101, "Revenue Recognition in Financial Statements," which addressed
some of the staff's concerns over the application of Generally Accepted
Accounting Principles for revenue recognition. The Company will be required to
adopt the Provisions of SAB 101 in the fourth quarter of 2000. The Company does
not expect this adoption to have a material effect on the Company's financial
position or its results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, as amended, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company presently does not have any derivative
instruments or hedging activities and, consequently, SFAS No. 133 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flow.
In May 2000 the EITF issued EITF No. 00-10, "Accounting for Shipping
and Handling Fees and Costs." The EITF reached a consensus that a seller of
goods should classify amounts billed to customers for shipping and handling fees
as revenue. Further, recent SEC guidance has suggested that a company should
include shipping and handling costs in cost of sales. The Company's current
policy is to classify such costs within selling, general and administrative
expenses. The Company is currently evaluating its current policy in light of the
recent SEC guidance and will adopt EITF 00-10 as required during the fourth
quarter of 2000, including the classification of such costs. In the three and
nine months ended September 30, 2000 these costs totaled $3.7 million and $8.0
million, respectively, compared to $1.5 million and $3.9 million for the same
periods in 1999. It is expected that any reclassification to record amounts
billed to customers for shipping and handling fees as revenue will not be
significant.
8
<PAGE> 9
7. SUPPLEMENTAL CASH FLOW INFORMATION
The Company recorded a charge to retained earnings (deficit) of
$1,832,000 and $1,821,000 for the nine months ended September 30, 2000 and 1999,
respectively, representing the accretion of redeemable cumulative preferred
interests at a compounded annual rate of 12%.
8. GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As of May 18, 1999 and June 30, 2000, Sleepmaster and each of its
domestic wholly owned subsidiaries ("Guarantor Subsidiaries") fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal and interest with respect to the $115,000,000 of 11% senior
subordinated notes due 2009 and the $25,000,000 of 13.4% senior subordinated
notes due 2009 (the "Notes"), respectively. The Company generates funds
necessary to satisfy its debt service obligations from either its own operations
or by cash generated by the operations of its subsidiaries. There are no
contractual or legal restrictions that could limit the Company's ability to
obtain cash from its subsidiaries for the purpose of meeting its debt service
obligations, including the payment of principal and interest on the Notes.
Although holders of the Notes will be direct creditors of Sleepmaster's
principal direct subsidiaries by virtue of the guarantees, Sleepmaster has a
foreign subsidiary ("Non-Guarantor Subsidiary") that is not included among the
Guarantor Subsidiaries and such subsidiary will not be obligated with respect to
the Notes. As a consequence, the claims of creditors of the Non-Guarantor
Subsidiary will effectively have priority with respect to the assets and
earnings of this subsidiary over the claims of creditors of Sleepmaster,
including the holders of the Notes.
The following supplemental condensed consolidating financial statements
present:
1. Condensed consolidating balance sheets as of September 30, 2000 and
December 31, 1999; condensed consolidating statements of income for the
three and nine months ended September 30, 2000 and 1999, respectively;
condensed consolidating statements of cash flows for the nine months
ended September 30, 2000 and 1999.
2. Sleepmaster, combined Guarantor Subsidiaries and Non-Guarantor
Subsidiary with their investments in subsidiaries accounted for using
the equity method.
3. Elimination entries necessary to consolidate Sleepmaster and all of
its subsidiaries.
9
<PAGE> 10
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 21,769 $ 73,887 $ 5,065 $ (607) $100,114
Costs and expenses:
Cost of sales 14,472 43,983 3,169 (607) 61,017
Selling, general and
administrative expenses 5,195 19,986 1,010 -- 26,191
Amortization of intangibles 170 1,720 95 -- 1,985
Interest expense, net 6,534 2,043 (3) -- 8,574
Other expense (income), net 12 (15) -- -- (3)
-------- -------- -------- -------- --------
(Loss) income before income
taxes (4,614) 6,170 794 -- 2,350
(Benefit) provision for income taxes (1,095) 2,833 283 -- 2,021
(Income) loss from equity
investees, net of tax (3,848) -- -- 3,848 --
-------- -------- -------- -------- --------
Net income $ 329 $ 3,337 $ 511 $ (3,848) $ 329
======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 11
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 21,755 $ 22,025 $ 4,718 $ (367) $ 48,131
Costs and expenses:
Cost of sales 14,401 12,803 2,864 (367) 29,701
Selling, general and
administrative expenses 4,942 5,399 904 -- 11,245
Amortization of intangibles 161 297 142 -- 600
Interest expense, net 3,364 58 1 -- 3,423
Other expense (income), net 103 (13) 3 -- 93
-------- -------- -------- -------- --------
(Loss) income before income
taxes and extraordinary items (1,216) 3,481 804 -- 3,069
(Benefit) provision for income taxes (480) 1,489 289 -- 1,298
(Income) loss from equity
investees, net of tax (2,507) -- -- 2,507 --
-------- -------- -------- -------- --------
Net income $ 1,771 $ 1,992 $ 515 $ (2,507) $ 1,771
======== ======== ======== ======== ========
</TABLE>
11
<PAGE> 12
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 59,059 $149,003 $ 13,339 $ (1,268) $220,133
Costs and expenses:
Cost of sales 39,568 88,658 8,397 (1,268) 135,355
Selling, general and
administrative expenses 13,829 40,393 2,816 -- 57,038
Amortization of intangibles 415 3,189 288 -- 3,892
Interest expense (income), net 13,225 5,700 (5) -- 18,920
Other expense (income), net 94 (28) (24) -- 42
-------- -------- -------- -------- --------
(Loss) income before income
taxes (8,072) 11,091 1,867 -- 4,886
(Benefit) provision for income taxes (2,662) 5,062 648 -- 3,048
(Income) loss from equity
investees, net of tax (7,248) -- -- 7,248 --
-------- -------- -------- -------- --------
Income (loss) before extraordinary items 1,838 6,029 1,219 (7,248) 1,838
Extraordinary items, net of income taxes (208) -- -- -- (208)
-------- -------- -------- -------- --------
Net income (loss) $ 1,630 $ 6,029 1,219 $ (7,248) $ 1,630
======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 59,000 $ 56,597 $ 7,011 $ (496) $122,112
Costs and expenses:
Cost of sales 38,782 33,203 4,280 (496) 75,769
Selling, general and
administrative expenses 13,809 14,221 1,416 -- 29,446
Amortization of intangibles 483 815 142 -- 1,440
Interest expense, net 8,126 164 3 -- 8,293
Other expense, net 54 -- 5 -- 59
-------- -------- -------- -------- --------
(Loss) income before income taxes and
extraordinary items (2,254) 8,194 1,165 -- 7,105
(Benefit) provision for income taxes (984) 3,581 419 -- 3,016
(Income) loss from equity investees,
net of tax (5,359) -- -- 5,359 --
-------- -------- -------- -------- --------
(Loss) income before extraordinary items 4,089 4,613 746 (5,359) 4,089
Extraordinary items, net of income taxes (3,167) -- -- -- (3,167)
-------- -------- -------- -------- --------
Net income $ 922 $ 4,613 $ 746 $ (5,359) $ 922
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 14
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON-
GUARANTOR GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 142 $ 1,662 $ 582 $ -- $ 2,386
Accounts receivable 12,425 25,793 2,691 -- 40,909
Accounts receivable--other 1,088 776 8 -- 1,872
Intercompany receivable -- 41,625 2,591 (44,216) --
Inventories 2,410 10,972 432 -- 13,814
Other current assets 4,311 2,235 158 (3,930) 2,774
Deferred income taxes 692 1,342 -- (1,469) 565
--------- --------- --------- --------- ---------
Total current assets 21,068 84,405 6,462 (49,615) 62,320
--------- --------- --------- --------- ---------
Property, plant and equipment, net 4,859 44,001 919 -- 49,779
Intangible assets, net 16,753 270,567 15,701 -- 303,021
Intercompany receivable (payable) 72,681 -- -- (72,681) --
Investment in subsidiaries 235,738 -- -- (235,738) --
Other assets 11,081 1,126 30 -- 12,237
Deferred income taxes 12,011 6,218 -- (18,229) --
--------- --------- --------- --------- ---------
Total assets $ 374,191 $ 406,317 $ 23,112 $(376,263) $ 427,357
========= ========= ========= ========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 5,994 $ 21,726 $ 1,113 $ 25 $ 28,858
Accrued advertising and sales allowances 4,600 5,824 663 -- 11,087
Accrued interest 6,672 200 -- -- 6,872
Other current liabilities 1,719 9,849 993 (3,930) 8,631
Intercompany payable (receivable) 44,211 -- -- (44,211) --
Deferred income taxes -- 1,274 195 (1,469) --
Current portion of long-term debt 9,375 515 -- -- 9,890
--------- --------- --------- --------- ---------
Total current liabilities 72,571 39,388 2,964 (49,585) 65,338
--------- --------- --------- --------- ---------
Intercompany payable -- 72,681 -- (72,681) --
Long-term debt 255,781 16,315 -- -- 272,096
Deferred income taxes -- 50,144 -- (18,229) 31,915
Other liabilities 416 1,000 665 -- 2,081
--------- --------- --------- --------- ---------
Total long-term liabilities 256,197 140,140 665 (90,910) 306,092
--------- --------- --------- --------- ---------
Redeemable cumulative preferred interests 22,255 -- -- -- 22,255
Members' equity (deficit) 23,168 226,789 19,483 (235,768) 33,672
--------- --------- --------- --------- ---------
Total liabilities and members' equity
(deficit) $ 374,191 $ 406,317 $ 23,112 $(376,263) $ 427,357
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED NON-
GUARANTOR GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,294 $ 934 $ 612 $ 2 $ 2,842
Accounts receivable 10,282 11,800 2,310 (175) 24,217
Accounts receivable--other 1,061 630 -- -- 1,691
Intercompany (payable) receivable (17) 18,144 1,503 (19,630) --
Inventories 2,378 4,637 516 -- 7,531
Other current assets 1,076 626 24 (393) 1,333
--------- --------- --------- --------- ---------
Total current assets 16,074 36,771 4,965 (20,196) 37,614
--------- --------- --------- --------- ---------
Property, plant and equipment, net 4,477 15,773 717 -- 20,967
Intangible assets, net 17,119 97,707 15,998 -- 130,824
Intercompany receivable (payable) 67,378 -- -- (67,378) --
Investment in subsidiaries 67,628 -- -- (67,628) --
Other assets 19,132 569 3 (122) 19,582
--------- --------- --------- --------- ---------
Total assets $ 191,808 $ 150,820 $ 21,683 $(155,324) $ 208,987
========= ========= ========= ========= =========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,984 $ 8,808 $ 645 $ (173) $ 14,264
Accrued advertising and sales allowances 3,541 1,758 456 -- 5,755
Other current liabilities 4,251 3,327 1,364 (393) 8,549
Intercompany payable (receivable) 19,599 -- -- (19,599) --
Current portion of long-term debt 4,500 510 -- -- 5,010
--------- --------- --------- --------- ---------
Total current liabilities 36,875 14,403 2,465 (20,165) 33,578
--------- --------- --------- --------- ---------
Intercompany payable (receivable) -- 67,378 -- (67,378) --
Long-term debt 153,800 7,803 -- -- 161,603
Other liabilities (437) 1,337 685 (122) 1,463
--------- --------- --------- --------- ---------
Total long-term liabilities 153,363 76,518 685 (67,500) 163,066
--------- --------- --------- --------- ---------
Redeemable cumulative preferred interests 20,423 -- -- -- 20,423
Members' (deficit) equity (18,853) 59,899 18,533 (67,659) (8,080)
--------- --------- --------- --------- ---------
Total liabilities and members' equity
(deficit) $ 191,808 $ 150,820 $ 21,683 $(155,324) $ 208,987
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 24,812 $ 6,303 $ 305 $(7,248) $ 24,172
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (1,037) (5,153) (334) -- (6,524)
Acquisitions, net of cash acquired (160,900) (38) -- 38 (160,900)
Net activity in investment in
subsidiaries (7,210) -- -- 7,210 --
------- ------- ------- ------- -------
Net cash (used in) provided by investing
activities (169,147) (5,191) (334) 7,248 (167,424)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of senior
subordinated notes 25,000 -- -- -- 25,000
Proceeds from long-term debt 167,500 (383) -- -- 167,117
Payments on long-term debt (83,344) -- -- -- (83,344)
Borrowings under revolving line of credit 25,060 -- -- -- 25,060
Payments on revolving line of credit (27,361) -- -- -- (27,361)
Loan origination fees (5,898) -- -- -- (5,898)
Capital contributions 42,222 -- -- -- 42,222
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities 143,179 (383) -- -- 142,796
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents (1,156) 729 (29) -- (456)
Cash and cash equivalents, beginning of
period 1,297 934 611 -- 2,842
------- ------- ------- ------- -------
Cash and cash equivalents, end of period $ 141 $ 1,663 $ 582 $ -- $ 2,386
======= ======= ======= ======= =======
</TABLE>
16
<PAGE> 17
SLEEPMASTER L.L.C. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
GUARANTOR NON-GUARANTOR
SLEEPMASTER SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $15,891 $ 192 $ 1,071 $(5,402) $11,752
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of property, plant and
equipment, net (2,250) (665) (23) -- (2,938)
Proceeds from sale of assets -- 11 -- -- 11
Acquisitions, net of cash acquired (42,263) -- -- 690 (41,573)
Net activity in investment in
subsidiaries (5,434) -- -- 5,434 --
------- ------- ------- ------- -------
Net cash (used in) provided by investing
activities (49,947) (654) (23) 6,124 (44,500)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of senior
subordinated notes 115,000 -- -- -- 115,000
Payments on long-term debt (63,996) (285) -- -- (64,281)
Loan origination fees/bond issuance costs (5,787) -- -- -- (5,787)
Penalties paid on early extinguishment of debt (3,645) -- -- -- (3,645)
Distributions (748) -- -- -- (748)
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 40,824 (285) -- -- 40,539
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents 6,768 (747) 1,048 722 7,791
Cash and cash equivalents, beginning of
period 41 843 -- (722) 162
------- ------- ------- ------- -------
Cash and cash equivalents, end of period $ 6,809 $ 96 $ 1,048 $ -- $ 7,953
======= ======= ======= ======= =======
</TABLE>
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and the related Notes thereto
included elsewhere herein.
GENERAL
Sleepmaster acquired the stock of Crescent on June 30, 2000, the stock of
Simon on April 28, 2000, substantially all of the assets of Adam Wuest on
November 5, 1999, substantially all of the assets of Star on May 18, 1999 and
the stock of Herr on February 26, 1999. Each of these acquisitions has been
accounted for using the purchase method of accounting. The Company's historical
results of operations reflect the results of the acquired businesses since their
respective dates of acquisition. Therefore, the historical operating results of
the Company for the periods presented are not necessarily comparable.
QUARTER ENDED SEPTEMBER 30, 2000 AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Net Sales. Net sales increased 108.0%, or $52.0 million, to $100.1 million
for the quarter ended September 30, 2000, from $48.1 million for the quarter
ended September 30, 1999. Substantially all of the increase was due to the
contribution of net sales from Adam Wuest, acquired on November 5, 1999, Simon
acquired on April 28, 2000 and Crescent, acquired on June 30, 2000. The increase
in net sales attributable to Adam Wuest, Simon and Crescent in the third quarter
of 2000 totaled $51.7 million. Excluding these acquisitions net sales increased
by 0.8%, or $0.3 million, for the third quarter of 2000 as compared to the same
period in 1999. The decline in sales growth is attributable to the increased
competitive environment for the three months ended September 30, 2000 as
compared to the same period in 1999. The Company expects this trend to continue
in the short term.
Cost of Sales. Cost of sales increased 105.4%, or $31.3 million, to $61.0
for the third quarter of 2000, from $29.7 million for the third quarter of 1999.
Cost of sales as a percentage of net sales decreased from 61.7% in 1999 to 60.9%
in 2000. Margins were favorably impacted by the Company's obtaining volume
related cost savings on raw material purchases as a result of the acquisitions.
This impact was partially offset by an increase in direct labor costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 132.9%, or $15.0 million, to $26.2
million for the third quarter of 2000 from $11.2 million for the same period of
1999. The increase in SG&A is primarily attributable to the SG&A associated with
the Company's acquisitions of Adam Wuest, Simon and Crescent. SG&A as a
percentage of sales increased to 26.2% in the third quarter of 2000 from 23.4%
in the third quarter of 1999. The following three factors also contributed to
the increase: (1) an increase in selling related costs in an effort to increase
the Company's market share (2) increased shipping costs as a result of higher
fuel costs in 2000 as compared to 1999 (3) an increase in corporate costs
associated with the aforementioned acquisitions.
Amortization of Intangibles. Amortization of intangibles increased $1.4
million to $2.0 million for the third quarter of 2000 from $0.6 for the third
quarter of 1999. This increase is the result of additional amortization relating
to the intangible assets acquired in connection with the acquisitions of Adam
Wuest, Simon and Crescent.
Interest Expense, Net. Interest expense increased $5.2 million to $8.6
million for the quarter ended September 30, 2000 from $3.4 million for the
quarter ended September 30, 1999. A majority of the increase was primarily
attributable to the cost of additional debt financing incurred for the
acquisitions of Adam Wuest, Simon, and Crescent. Also contributing to the
increase was the increase in interest rates which paralleled the Federal Reserve
rate increases.
18
<PAGE> 19
Provision for Income Taxes. The provision for income taxes resulted in an
effective tax rate of 86% in the third quarter of 2000 as compared to 42% in the
same period in 1999. The increase in the effective tax rate is a result of the
significant increase in non-deductible goodwill as a result of the Simon and
Crescent acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Net sales increased 80.3%, or $98.0 million, to $220.1 for the
nine months ended September 30, 2000, from $122.1 million for the nine months
ended September 30, 1999. Substantially all of the increase was attributable to
the contribution of net sales from Herr, Star, Adam Wuest, Simon and Crescent,
which totalled $95.6 million. Excluding these acquisitions, net sales increased
by 3.2%, or $3.2 million, for the nine months ended September 30, 2000 as
compared to the same period in 1999. The decline in sales growth is attributable
to the increased competitive environment for the three months ended September
30, 2000 as compared to the same period in 1999. The Company expects this trend
to continue in the short term.
Cost of Sales. Cost of sales increased 78.6%, or $59.6 million, to $135.4
million for the nine months ended September 30, 2000, from $75.8 million for the
same period in 1999. Cost of sales as a percentage of net sales decreased
slightly from 62.0% in 1999 to 61.5% in 2000. Margins were favorably impacted by
the Company's obtaining volume-related cost savings on raw material purchases as
a result of the acquisitions. This impact was substantially offset by an
increase in direct labor costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 93.7%, or $27.6 million, to $57.0
million for the nine months ended September 30, 2000 from $29.4 million for the
same period of 1999. The increase in SG&A is primarily due to the SG&A
associated with the Company's acquisitions of Herr, Star, Adam Wuest, Simon and
Crescent. The following three factors also contributed to the increase: (1) an
increase in selling related costs in an effort to increase the Company's market
share, (2) increased shipping costs as a result of higher fuel cost in 2000 as
compared to 1999, (3) an increase in corporate costs associated with the
aforementioned acquisitions.
Amortization of Intangibles. Amortization of intangibles increased $2.5
million to $3.9 million for the nine months ended September 30, 2000 from $1.4
for the same period of 1999. The increase is the result of additional
amortization relating to the intangible assets acquired in connection with the
acquisitions.
Interest Expense, Net. Interest expense increased $10.6 million to $18.9
million for the nine months ended September 30, 2000 from $8.3 million for the
same period in 1999. A majority of the increase was attributable to the cost of
additional debt financing incurred for the acquisitions. Also contributing to
the increase was the increase in interest rates which paralleled the Federal
Reserve rate increases.
19
<PAGE> 20
Provision for Income Taxes. The provision for income taxes resulted in an
effective tax rate of 62.4% for the nine months ended September 30, 2000, as
compared to 42.0% in the same period in 1999. The increase in the effective tax
rate resulted from a significant increase in non-deductible goodwill as a
result of the Simon and Crescent acquisitions.
Extraordinary Items. The extraordinary item recorded in the nine months
ended September 30, 2000 consisted of a write-off of unamortized debt issuance
costs of $346,000 (pre-tax) and was recorded in connection with the Company's
third amended credit facility. The extraordinary item recorded in the nine
months ended September 30, 1999 consisted of the payment of $3.6 million in
premiums on the redemption of $20 million in aggregate principal amount of
Series A and Series B 12% Subordinated Notes and repayment of $69.2 million of
borrowings under the Company's former credit facility, together with the
write-off of $1.8 million of unamortized debt issuance costs relating to such
redemption and repayment on May 18, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to fund its liquidity needs is
provided by its operating activities and availability under its current credit
facility. The Company has funds available under an existing credit facility
totaling $21.5 million. Historically the Company has used the proceeds from
financing activities for the acquisitions of other Serta licenses. During 1999
and the nine months ended September 30, 2000 the Company acquired five other
Serta Companies with funds totaling $260.0 million. The company historically has
used cash generated by operations to reinvest in its property, plant and
equipment, with the remainder used to repay its credit facilities.
Cash and cash equivalents decreased by $0.4 million to $2.4 million as
of September 30, 2000 from $2.8 million as of December 31, 1999. The Company
generated $24.1 million of net cash from its operations in the nine months
ended September 30, 2000 as compared to $11.7 million in the same period in
1999. The increase was primarily attributable to the growth of the business,
principally through its acquisitions. Capital expenditures totaled $6.5 million
in the nine months ended September 30, 2000 as compared to $2.9 million in the
same period in 1999. The increase in capital expenditures was primarily
attributable to the building of a new facility located in California. The
Company expects that capital expenditures at all existing facilities will be
approximately $10.0 million in 2000. Management believes that annual capital
expenditures limitations under its current credit facility will not
significantly inhibit Sleepmaster from meeting its capital needs.
The Company's management projected an approximately $2.8 million of
capital expenditures in the fourth quarter of 2000, most of which can be
attributed to the new California plant. Management believes that the capital
expenditure limitations under its Credit Facility will not impact its current
business plan.
On April 28, 2000, Sleepmaster amended and restated its existing credit
facility to provide for borrowings of up to $103,875,000, comprising a
$33,000,000 revolving credit facility, a $35,875,000 amortizing term loan
facility and a $35,000,000 incremental amortizing term loan facility (the
"Second Amended and Restated Credit Facility"). The terms of the Second Amended
and Restated Credit Facility were substantially equivalent to those of the prior
facility.
On June 30, 2000, the Company issued an additional $25,000,000 of 13.4%
senior subordinated notes due November 2009. Sleepmaster used the proceeds of
the senior subordinated notes to acquire all the capital stock of Crescent. Also
on June 30, 2000, in connection with the acquisition of Crescent, the Company
entered into a third amended and restated credit agreement to provide for an
aggregate amount of borrowings of up to $172,500,000, comprising a $40,000,000
5.5 year revolving credit facility, a 5.5 year Tranche A term loan of
$57,500,000 and a 6.5 year Tranche B term loan of $75,000,000 (the "Third
Amended and Restated Credit Facility"). Similar to the prior credit facility,
the revolving credit facility includes a sublimit for letters of credit. This
new facility includes a letter of credit sublimit of $25,000,000. At June 30,
2000, the Company had approximately $17.4 million available under its revolving
credit facility with letters of credit issued totaling approximately $18.6
million.
20
<PAGE> 21
Management believes that cash flows generated from operations, together
with its borrowing capacity, are sufficient to support the Company's operations
and general business and liquidity requirements for the foreseeable future.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from fluctuations in interest rates,
which could impact its consolidated financial position, results of operations
and cash flows. The Company manages its exposure to market risk through its
regular operating and financing activities. The Company does not use derivative
financial instruments for speculative or trading purposes and does not maintain
such instruments that may expose the Company to significant market risk.
The Company's earnings are sensitive to changes in short-term interest
rates as a result of its borrowings under the amended and restated credit
facility. The Company also manages its portfolio of fixed-rate debt to reduce
its exposure to interest rate changes. The fair value of the Company's
fixed-rate long-term debt is sensitive to interest rate changes. Interest rate
changes would result in gains or losses in the fair value of this debt due to
differences between market interest rates and rates at the inception of the
obligation. Management does not foresee nor expect any significant changes in
its exposure to interest rate fluctuations, or in how such exposure is managed
in the near future.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This document contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although the Company believes its plans are based upon reasonable
assumptions as of the current date, it can give no assurance that such
expectations can be attained. Factors that could cause actual results to differ
materially from the Company's expectations include; general business and
economic conditions; competitive factors; raw materials availability and
pricing; fluctuations in demand; and retention and availability of qualified
employees.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the
normal course of business, most of which involves claims for personal injury and
property damage incurred in connection with its operations. Management believes
that none of these actions will have a material adverse effect on the financial
position, results of operations or cash flows, of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
Report on Form 8-K/A, filed September 13, 2000, concerning the
Company's acquisition of Crescent Sleep Products Company.
Report on Form 8-K/A, filed on July 12, 2000, concerning the Company's
acquisition of Simon Mattress Manufacturing Company.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Linden,
State of New Jersey.
SLEEPMASTER L.L.C.
By: /s/ Charles Schweitzer
--------------------------------------
President and Chief Executive Officer
Dated: November 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Charles Schweitzer President and Chief Executive November 14, 2000
---------------------------
Charles Schweitzer Officer, Advisor
/s/ James P. Koscica Executive Vice President and Chief November 14, 2000
---------------------------
James P. Koscica Financial Officer, Advisor
</TABLE>
23
